Social Policy Will Be Critical To A Sustainable EMU

European policy-makers have some vitally important decisions to make in the coming weeks. The June meeting of the European Council is due to consider the role of social policy in the wider context of economic and monetary union (‘EMU’). The background to this process consists, firstly, of the adoption in November 2012 of the Blueprint for a deep and genuine EMU which referred to the need for greater policy coordination in the ‘field of employment’. Then in May 2013 the Commission Vice-President and Commissioner for Monetary Affairs informed the European Parliament that he was ‘working on preparing proposals to strengthen the social dimension of EMU’ and on ‘finding ways to better integrate the social dimension in the current structures for economic governance’, including ‘strengthening the surveillance of employment and social developments within the European Semester framework’.

It is clear what this could mean: a renewed effort to impose deregulatory policies on the member states, of the kind put forward by the Troika in its dealings with Greece, Portugal and Ireland. The logic of this approach is that ‘structural reforms’ in labour markets, by cutting nominal wages and enhancing flexibility in hiring and firing, will restore competitiveness in the states and regions adversely affected by the crisis.

This approach is consistent with the new economic governance which has been developing since 2010 around measures including the ‘six pack’, the Euro Plus Pact and the Treaty on Stability, Coordination and Governance (TSCG). These measures are based on the premise that if a stricter regime of macroeconomic surveillance had been in place during the 2000s, the fiscal imbalances which threatened the stability of the single currency and the wider Eurozone after 2008 could have been avoided. This is a false premise. Prior to the onset of the crisis, all the Eurozone states with the exception of Greece were in compliance with the convergence criteria.

The problem was that their real economies were far from aligned. The future debtor states were mostly pursuing policies of financially-driven growth which were dependent on an expansion of private credit and on increasing asset prices in the markets for commercial and residential property. Thanks in part to loose arrangements for wage determination, wages in these states rose faster than productivity (Johnston and Hancké, 2009). The future creditor states, by contrast, were mostly following policies of ‘endogenous’ or industry-led growth which depended on targeted investment in capital goods, public support for training and labour force upgrading, and wage moderation supported by coordinated collective bargaining. They were better placed to deal with the shock induced by the financial crisis when it arrived in 2008, but it must be remembered that their competitive advantage was, in part, the result of policies in the ‘core’ which were, in effect, exporting wage and price inflation to the faster-growing ‘periphery’ (Armingeon and Baccaro, 2012).

The policy of enforced austerity, administered at first through the interventions of the Troika and subsequently through the ‘new economic governance’, does not address these fundamental imbalances. The TSCG, in its attempt to embed a pro-cyclical fiscal policy at the level of constitutional governance, is in danger of becoming a dead letter within months of its implementation. Wage cuts and casualisation of employment are inducing depression-type conditions in the indebted states, but in the absence of productivity improvements they cannot address the underlying causes of the competitiveness gap, as the IMF has recently acknowledged in its assessment of the response to the Greek crisis (IMF, 2013).

The question now facing the European institutions is whether they can demonstrate the flexibility needed to effect a change of course. The debate over the ‘social dimension’ of EMU is to be welcomed for at least putting the relationship between social policy and monetary policy on the agenda. A ‘deep and sustainable EMU’ can only be one which promotes sustainable growth and social cohesion. To get to this point, a deepening of efforts at economic and social policy coordination will be needed. But this cannot plausibly take the form of the socially divisive and economically counter-productive policies which have been pursued to this point.

What would a sustainable EMU look like? To begin with, it would acknowledge that the most successful countries and regions within the single currency area during the past decade have been those that combined investment in human capital with strong welfare states and coordinated wage bargaining. Egalitarian policies in labour and social security law, designed to narrow earnings inequalities while promoting labour market access, help to build a stable tax base. Active labour market policies, coupled with legally-mandated vocational training systems, enable economies to adapt to global competitive pressures and the ‘creative destruction’ associated with technological change. Solidaristic wage bargaining, based on the principle of maintaining a floor to wages and conditions at sectoral and national level, has helps to ensure effective demand for locally produced goods and services in the face of recessionary conditions.

The EU already has in place the institutional mechanisms needed to promote learning around ‘what works’ in economic and social policy. To this extent, the new economic governance marks a step forward. A shift of emphasis within EMU, towards a growth-orientated and egalitarian form of economic union, does not have to wait for Treaty revisions.

The European institutions have shown a high degree of adaptability in the face of the crisis. This is most clearly so in the case of the ECB, which has overcome supposed limitations on its mandate to become an effective line of defence against the destabilising effects of currency speculation, through its outright market transactions programme. The Court, in the Pringle judgment, also demonstrated flexibility in finding a solution to the constitutional issues surrounding the adoption of the European Stability Mechanism Treaty, at the same time validating the central bank’s interventions in the market for sovereign debt.

It is now down to the other institutions to show similar flexibility. The June European Council provides the ideal moment.

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